When a Guarantee Must Be Evidenced in Writing

When seeking a loan from a creditor such a bank, a seemingly poor lending capacity could be quickly improved if a guarantor also enters into the agreement. What this means is that a guarantor – someone who has a good borrowing capacity and strong credit history – will guarantee to pay a borrower’s debt in the event the borrower defaults on their loan, allowing the borrower to secure the requested loan.

A guarantee is an important means of assurance to one party in the case that another party fails to meet their legal obligations.  However, it is important to note that a guarantor does not have a claim to the asset; they are merely involved as a security that the loan will be paid back to the creditor on time.

Does the guarantee have to be in writing?

While in Australia it is not always legally required that a guarantee is provided in writing (in the cases of a personal guarantee, for example), it is strongly recommended, as oral agreements become very challenging to dispute in court. You will find that when guarantees are made to a creditor, such as a bank, it will always be provided in writing to enforce personal liability.

Similarly, the National Credit Code requires that for guarantee to be legally enforceable, they must be in writing and signed by the guarantor. A copy of this must be provided to the guarantor for their records, so they are aware of the formal obligations of the contract and how it will be enforced.

There have been many recent and complex legal cases in Australia where no formal contract of guarantee was prepared or signed, yet the transactions involving a guarantor’s name within the correspondence were still legally enforceable. Therefore, formally written and signed guarantees are a must!

What needs to be considered?

Guarantees are risky, and in some instances, continuing guarantees will remain until they are cancelled through mutual consent. That is why it is so important that guarantees have a time limit and a limit on the amount of liability involved.

The final and most important point to consider is that the safest action is to make it clear that no legally binding relations will arise until formal documents are signed by all parties involved, including the guarantor.

More information

It is recommended that before people enter a guarantee with anyone, they seek legal advice on their personal situation, their obligations and the full extent of their liability, including the effects that insolvency can have on them in the future. Our team of expert lawyers are highly experienced in in litigation and dispute resolution and are available to provide advice to your personal circumstances. Get in touch today.